Chapter 1

The European VC ecosystem at a glance

The Data

VC investment stages and scope

What does the last decade of VC investing in Europe reveal?

We are used to the European venture capital (VC) industry making headlines. Investments in innovative start-ups are rampant, on course to reach a new all-time high. From 2007 to 2015, investors poured about EUR 35bn into early and later-stage start-ups located in the 28 EU countries.

Where did all this money go? Mostly into a handful of places: out of the 272 sub-national regions in Europe targeted by VC investors, the largest six made up one third of all investment activity (in comparison, two thirds of the total activity took place in 31 regions instead).

Regional distribution of venture capital activity


The start-up ecosystem in Europe remains heavily concentrated. However, seven new regions have replaced others in the top 20 ranking by investment volumes since 2007. All in all, emerging hubs have started to shake up the status quo.

What does this mean for the typical start-up? The average amount received in an initial VC round was EUR 1.45m, but due to the high variation, this number doesn’t apply to most start-ups. Availability of capital and investment preferences in the region play an important role: ventures in the France and Benelux region secured on average 40% more funding than those in the Nordics and Germany and Austria (DACH) regions. Meanwhile, start-ups in the British Isles received a 25% higher average investment than France and Benelux.

Interestingly, start-ups in the Central and Eastern European (CEE) and Mediterranean countries received the highest average investment volume. This result is likely driven by the smaller size of the VC industry in these regions, which reduces the opportunities to create well-diversified portfolios.

Top NUTSa regions by received VC volumes


Fastest growing NUTS regions


Number of VC-backed start-ups by stage


Aside from geography, the amount of money a start-up will receive is also shaped by its stage and industry. It is no surprise that later-stage ventures tend to receive significantly more money than seed and start-up firms. Similarly, the life sciences industry’s strong needs for capital translate into larger investment rounds than information and communications technology (ICT), which in turn gets about as much money as manufacturing or green technologies on average. Meanwhile, the services industry records the smallest average amounts.

The European start-up scene might very well be at its most vibrant, but the road to prosperity hasn’t exactly been smooth. After rising from the ashes brought by the dot-com crash, the European VC industry suffered another crunch following the 2007 financial crisis. The crisis severely affected the VC market with both the number of invested start-ups as well as total activity volumes decreasing. The data shows that VC investments peaked in 2008 before a decline, which reversed only in 2014.

The downturn affected all VC financing stages, although later-stage investments suffered somewhat more, decreasing by 46% from 2008 to 2014. Investments in the start-up stage (a type of early-stage investment) represented more than half of total investment between 2007 and 2015.

In the aftermath of the crisis, the average VC round fell by almost 50% in volume compared to the pre-crisis levels in 2007. As a result, the median VC-backed company has shrunk in size. This could be a reflection of VC firms reverting to earlier stage investment opportunities, due to a lack of follow-on opportunities induced by the financial crisis itself.

As the effects of the financial crisis started to subside, there has been a reversed upward trend in VC financing. The average VC investment round since 2013 has been in line with pre-crisis figures. Overall, the industry picked up pace again, with total number of invested companies continuing to increase.

Is there a “typical” European VC-backed start-up?

Two thirds of European VC-backed start-ups operated in the ICT and services sectors from 2007 to 2015. This was the case in most geographic regions, with the British Isles exhibiting the highest share of ICT start-ups (50%). The Nordics region boasted the highest share of life sciences firms, representing 28% of total investment, distinctly higher than the European average of 17%.

Later-stage investments focused more on the manufacturing and services sectors, where companies are usually more likely to look for funds to expand their business rather than set it up. In all other industries, the general trend was maintained, with early-stage investments taking the lion’s share of overall activity.

The highest concentration of investees was recorded in the DACH and France and Benelux regions, 33% and 22% of total companies invested during the observed period, respectively. Throughout this time, the CEE and France and Benelux regions increased their share of overall new investments, while the relative importance of DACH and the Nordics decreased.

Share of VC-backed start-ups by sector


Share of VC-backed start-ups by stage and sector


Looking at investment amounts, however, paints a slightly different picture. In this case, France and Benelux together with British Isles top the list, hosting around a quarter of total invested volumes each while DACH arrives third with 21.9%. The geographic disparity between investment totals and invested firms is likely a result of Invest Europe’s better coverage of VC-backed companies in the DACH region.

Share of VC investment amount by region


European VC activity does not only take place in VC hubs. VC-backed start-ups are, in fact, spread all over Europe. Around 40% of start-ups are located in cities with more than one million inhabitants, whereas one quarter operate in small urban areas with a population of less than 100,000.

Since 2011, a higher number of VC-financed firms has set up business in large urban areas, mostly at the expense of start-ups established in smaller cities. This development is driven by the two leading sectors, ICT and services, where companies are more likely to benefit from economies of agglomeration (e.g. larger consumer and workforce base).

Share of VC investment amount by region


How do we track innovation?

Later vs Early

Anatomy of a start-up at the time of investment

In the end, there might be no ‘typical’ European start-up, but our research has uncovered a few interesting patterns. Companies in the British Isles, for example, record the highest number of employees at investment date, even at a very young stage - 48 employees against an average of 22 for the rest of the regions.

Nordic companies have the highest number of patents and the highest share of intangible assets, both indicators of high levels of innovation. On average, Nordic companies have one patent each, and boast the highest share of intangible assets (29% against an overall average of 15%). Yet, they rank among the worst in terms of operating revenue at the time of investment. This feature is also shared by Mediterranean start-ups, although these companies rank much worse in average number of patents.

On the other hand, France and Benelux and DACH companies record higher levels of operating revenue and, together with Mediterranean start-ups, marginally higher levels of total assets.

Median operating revenue at time of investment by region

in thousands EUR

Seed and start-up stage businesses recorded the highest number of patents and share of intangible assets – both indicators of high levels of innovation - issuing on average 90% more patents than later-stage businesses. Although this suggests that the early, rather than later, stage of a business’s life cycle is particularly innovative, later-stage firms have other means to signal their potential to venture capitalists (e.g. financial growth) thus they might be less incentivised to engage in high levels of patenting.

Patenting rate at time of investment by stage


Share of intangible assets as a proportion of total assets at time of investment by stage


When it comes to start-up performance across industries, there are only a handful of noteworthy differences. Manufacturing and services firms boasted the highest revenue and staff levels at the time of investment, partly due to their higher rate of later-stage ventures. Start-ups in the ICT sector required relatively modest levels of assets to kick-start their business.

Life sciences companies were the champions in patented innovations, followed by firms in the manufacturing sector. This is driven by the vastly different incentives to patenting across industries, as testified by the much more nuanced picture drawn by the share of intangibles at the date of investment. Here, no sector clearly overshadowed the others, while ICT start-ups are on par with life sciences businesses, slightly topping the rest.

Patenting rate at time of investment by sector


Share of intangible assets as a proportion of total assets at time of investment by stage


Mind the… missing data

Mind the... survival bias

What happens a few years after the VC investment?

Most key financial indicators increased over time, with some small differences across sectors. Turnover increased the most in ICT start-ups, while growth in total assets and capital was comparable across industries. Patent activity did not follow an increasing trend but is stable over time, with an average of 0.4 patents generated per year. The share of intangible assets increased following the VC investment but started to decline after a couple of years. Therefore, total assets increased proportionally more than the intangibles.

Early-stage companies grew faster than their later-stage counterparts in all indicators

but the share of intangible assets. In general, smaller firms exhibited a higher growth rate since they mainly focused on scaling up their business.

After three years, early-stage firms’ sales and staff had grown by 227% and 100% respectively. In comparison, these measures grew by 32% and 30% for later-stage firms.

High variation in performance trends makes it difficult to identify a ‘typical’ European start-up. We need more powerful analytical tools if we want to dig deeper into the nature of VC-backed start-ups.

Median levels of total assets after investment


Median levels of operating revenue after investment


Start-up story

Octo telematics

Start-up story